SCANDAL: JPMorgan’s Secret Risks Shock Markets
JPMorgan Chase & Co’s (NYSE:JPM) shocking announcement yesterday that it faces as much as $2 billion in mark-to-market losses is still reverberating through the financial sector. The losses stem from a synthetic credit portfolio managed out of its Chief Investment Office, and reportedly run by trader Bruno Iksil, a.k.a the ‘London Whale.’
Financial stocks fell worldwide on the news, which also dented JPMorgan’s squeaky clean reputation and CEO Jamie Dimon’s ultra-conservative approach to risk. Worse, the incident could bring financial institutions back under the lens of the demonic (to banks) Volcker rule that seeks to ban risky trading bets by banks.
The Wall Street Journal drew attention last month to the huge position built up by Iksil, with hedge funds ranged against him on the other side of the transactions. At the time, Dimon had brushed aside the report, saying it was “a complete tempest in a teapot.” Dimon has now admitted that the losses were indeed linked to the WSJ report, saying, “This puts egg on our face.”
As part of regulatory requirements the bank had informed the U.K.’s regulator, the Financial Services Authority, of the situation. According to a person in the know, the loss-making positions had been accumulated over many years, and the trades were vetted by management. According to Dimon, the hedging strategy had “morphed over time” and it was “ineffective, poorly monitored, poorly constructed and all of that.”
The CIO unit, previously projected to earn a profit of $200 million this quarter, will now be under water with a loss of an estimated $800 million. A hit of another $1 billion could arise, according to Dimon, who said, “It is risky and it will be for a couple quarters.”
Shares of JPMorgan were pummeled 7 percent in after-hours trading on Thursday following the news. “Jamie has always styled himself as one of the kings of Wall Street,” said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. “I don’t know how this went so bad so quickly with his knowledge and aversion to risk.”